EU's Rehn says Europe must press ahead with economic reforms

September 23, 2013|Daniel Bases and Steven C. Johnson | Reuters

(Dominic Ebenbichler Reuters, )

NEW YORK (Reuters) - The European Union's chief economic policymaker on Monday said German Chancellor Angela Merkel's strong showing in her country's election on Sunday demonstrated that Germany's push for economic reforms across the euro zone will continue, something that is critical to the region's health.

Germany is Europe's biggest economy and it has exercised a great deal of muscle in trying to guide the euro zone through the financial crisis and a recession that continues to grip much of the region, particularly some of the southern countries.

"It is now essential that we maintain the momentum on building a banking union, and in the member states that we not allow any room for complacency but stay the reform course" with regard to labor markets and pension systems, Olli Rehn, the European commissioner for economic and monetary affairs and the euro, said at a Thomson Reuters Newsmaker event in New York.

Merkel's conservative bloc won 42 percent of the vote in Germany's general election but appeared just short of the votes needed to rule on its own, and Merkel may have to convince leftist rivals to join a coalition government.

In response to the euro zone debt crisis in recent years, EU leaders proposed creating a banking union that would have a single bank supervisor and a single resolution mechanism for banks in trouble. But the appetite for moving to full fiscal and political union has appeared to diminish in recent months.

Rehn, in remarks at the Newsmaker event that covered the gamut of Europe's economic woes and tentative recovery, said it was essential to spur economic growth in order to remove the long shadow of high unemployment.

According to the latest International Monetary Fund World Economic Outlook forecast, the economic output of the euro area nations is expected to contract by 0.3 percent this year. Output is forecast to rebound in 2014 with a 1.1 percent growth rate.

Worries that the euro zone debt crisis could cause the euro to collapse have largely vanished this year, thanks in part to the European Central Bank's pledge to defend the currency.

But debt levels are still high in peripheral countries and concerns remain.

"There are certainly risks," Rehn said. "One is political instability, the other risk is policy and reform fatigue and complacency," adding that EU countries still need to tighten their belts.

Some economists and politicians have criticized EU austerity policies for forcing countries to reduce their deficits too quickly, which severely hampers growth.

Rehn said the ideal approach would be a more gradual pace of fiscal consolidation. "That's the ideal way of doing it. but we don't live in an ideal world," he said, adding neither Europe nor the United States has done enough to reduce deficits.

Rehn said there were some fragile "green shoots" of economic growth in Spain.

"We see certain signs of the reversal" in Spain's economic downturn, Rehn said, highlighting rapid export growth over the last two years.

"In the medium-term the prospects of the Spanish economy are clearly much better, but unfortunately Spain suffers from the very high level of macroeconomic imbalances," he said.

In France, the pace of reform is moving in the right direction but not quickly enough, he said.

The European Commission has given France two years to get its budget deficit below 3 percent of gross domestic product, and in return Paris was to undertake a broad reform of its pension system, one of the most generous in Europe.

Another wild card for European and global growth, especially emerging markets, is the future path of U.S. monetary and fiscal policy.

Last week, the U.S. Federal Reserve decided to maintain its pace of monetary support for the economy with continued purchases of U.S. government and agency-backed bonds at a monthly pace of $85 billion, a program designed to drive down long-term borrowing rates.

At the same time, the U.S. Congress is gearing up for a major fight over the perennial need to increase the government's borrowing limits. Failure to increase the debt ceiling could lead to a shutdown of the U.S. government.

Rehn said slower U.S. growth could hurt the European economy. Addressing the debt ceiling debate, he added: "I trust common sense will prevail."